UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
------
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
_____TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from________________ to________________
Commission file number: 0-8176
[LOGO] Southwest Water Company
(Exact name of registrant as specified in its charter)
Delaware 95-1840947
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
225 North Barranca Avenue, Suite 200
West Covina, California 91791-1605
(Address of principal executive offices) (Zip Code)
(626) 915-1551
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
-
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. On August 11, 2000, there
were 6,491,120 common shares outstanding.
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
INDEX
Part I. Financial Information: Page No.
- ------- ---------------------- --------
Item 1. Financial Statements:
Condensed Consolidated Statements of Income -
Three and Six Months Ended June 30, 2000 and 1999 1
Condensed Consolidated Balance Sheets -
As of June 30, 2000 and December 31, 1999 2
Condensed Consolidated Statements of Cash Flows -
Three and Six Months Ended June 30, 2000 and 1999 3
Notes to Condensed Consolidated Financial Statements 4 - 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 6 - 10
Part II. Other Information:
- -------- ------------------
Item 1. Legal Proceedings 10-11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Southwest Water Company and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
- ------------------------------------------------------------------------- ------------------------
2000 1999 2000 1999
- ------------------------------------------------------------------------- ------------------------
(in thousands except per (in thousands except per
share data) share data)
Operating Revenues $ 26,619 $ 19,454 $ 47,176 $ 36,103
Operating Expenses:
Direct operating expenses 19,621 14,038 35,694 26,574
Selling, general and administrative 3,472 2,845 6,582 5,779
- ------------------------------------------------------------------------- ------------------------
23,093 16,883 42,276 32,353
Operating Income 3,526 2,571 4,900 3,750
Other Income (Expense):
Interest expense (973) (747) (1,761) (1,506)
Interest income 21 19 103 36
Other (69) 100 (20) 252
- ------------------------------------------------------------------------- ------------------------
(1,021) (628) (1,678) (1,218)
Income Before Income Taxes 2,505 1,943 3,222 2,532
Provision for income taxes 1,002 778 1,289 1,013
- ------------------------------------------------------------------------- ------------------------
Net Income 1,503 1,165 1,933 1,519
Dividends on preferred shares 7 7 14 14
- ------------------------------------------------------------------------- ------------------------
Net Income Available for Common Shares $ 1,496 $ 1,158 $ 1,919 $ 1,505
========================================================================= ========================
Earnings per Common Share (Note 4):
Basic $ 0.23 $ 0.18 $ 0.30 $ 0.24
Diluted $ 0.22 $ 0.18 $ 0.28 $ 0.23
========================================================================= ========================
Cash Dividends per Common Share (Note 4) $ 0.06 $ 0.05 $ 0.12 $ 0.10
========================================================================= ========================
Weighted Average Outstanding Common Shares (Note 4):
Basic 6,481 6,412 6,472 6,389
Diluted 6,742 6,598 6,746 6,579
========================================================================= ========================
See accompanying notes to condensed consolidated financial statements.
1
Southwest Water Company and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
- -------------------------------------------------------------------------------------------
ASSETS 2000 1999
- -------------------------------------------------------------------------------------------
(unaudited)
(in thousands)
Current Assets:
Cash and cash equivalents $ 954 $ 4,146
Customers' accounts receivable, net 15,711 10,465
Other current assets 5,632 3,700
- -------------------------------------------------------------------------------------------
22,297 18,311
Property, Plant and Equipment:
Utility property, plant and equipment -- at cost 164,870 152,624
Contract operations property, plant and equipment -- at cost 9,821 5,654
- -------------------------------------------------------------------------------------------
174,691 158,278
Less accumulated depreciation and amortization 47,346 44,581
- -------------------------------------------------------------------------------------------
127,345 113,697
Other Assets 16,410 10,942
- -------------------------------------------------------------------------------------------
166,052 $ 142,950
===========================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------
Current Liabilities
Current portion of long-term debt and bank notes payable $ 3,624 $ 2,039
Accounts payable 3,824 2,081
Other current liabilities 14,214 12,486
- -------------------------------------------------------------------------------------------
21,662 16,606
Other Liabilities and Deferred Credits:
Long-term debt 28,000 28,000
Bank notes payable 13,800 5,454
Advances for construction 8,072 7,930
Contributions in aid of construction 35,906 34,519
Deferred income taxes 6,460 6,146
Other liabilities and deferred credits 10,191 3,818
- -------------------------------------------------------------------------------------------
Total Liabilities and Deferred Credits 124,091 102,473
Stockholders' Equity
Cumulative preferred stock 514 517
Common stock 65 64
Paid-in capital 31,422 31,080
Retained earnings 9,960 8,816
- -------------------------------------------------------------------------------------------
Total Stockholders' Equity 41,961 40,477
- -------------------------------------------------------------------------------------------
$ 166,052 $ 142,950
- -------------------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements
2
Southwest Water Company and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended
June 30,
- -------------------------------------------------------------------------------------------
2000 1999
- -------------------------------------------------------------------------------------------
(in thousands)
Cash Flows From Operating Activities:
Net Income $ 1,933 $ 1,519
Adjustments to reconcile net income to
net cash provided by (used in) operating activities (1,008) $ 2,289
- -------------------------------------------------------------------------------------------
Net cash provided by operating activities 925 3,808
- -------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Additions to property, plant and equipment (11,891) (4,246)
Other investments, net (2,524) 125
- -------------------------------------------------------------------------------------------
Net cash used in investing activities (14,415) (4,121)
- -------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Net proceeds (repayments) on bank notes payable 9,931 (317)
Contributions in aid of construction and advances for construction 803 704
Net proceeds from dividend reinvestment plan,
employee stock purchase plan, and stock option plans 355 557
Advances for construction 141 0
Dividends paid (789) (696)
Payments on advances for construction (143) (120)
- -------------------------------------------------------------------------------------------
Net cash used in financing activities 10,298 128
- -------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (3,192) (185)
Cash and cash equivalents at beginning of period 4,146 394
- -------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 954 $ 209
===========================================================================================
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 1,764 $ 1,482
Income taxes $ 27 $ 285
Depreciation and amortization $ 2,382 $ 2,244
Non-cash contributions in aid of construction
conveyed to Company by developers $ 1,108 $ 934
See accompanying notes to condensed consolidated financial statements.
3
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(Unaudited)
1. Southwest Water Company ("the Company" or "Registrant") together with its
subsidiaries is in the business of managing all aspects of water and
wastewater systems, and provides its services to more than one million
people in 29 states. Through its wholly owned subsidiary, ECO Resources,
Inc. ("ECO"), the Company operates and manages water and wastewater
treatment facilities owned by cities, municipal utility districts and
private entities. The Company owns and operates water and wastewater
utilities through two wholly owned subsidiaries, Suburban Water Systems
("Suburban") and New Mexico Utilities, Inc. ("NMUI"). In addition, the
Company owns a 49 percent interest in Windermere Utility Company
("Windermere") located near Austin, Texas. In April 2000, the Company
acquired an 80 percent interest in Master Tek International, Inc. ("Master
Tek"), which is a nationwide provider of utility submetering, billing and
collection services. The unaudited condensed consolidated financial
statements reflect all adjustments, which, in the opinion of management,
are necessary to present fairly the financial position of the Company as of
June 30, 2000, and the Company's results of operations for the three and
six months ended June 30, 2000. All such adjustments are of a normal
recurring nature. Certain reclassifications have been made to the 1999
financial statements to conform to the 2000 presentation.
2. Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. These condensed
consolidated financial statements should be read in conjunction with the
financial statements and related notes contained in the Company's Annual
Report on Form 10-K for the year ended December 31, 1999 ("the 1999 Annual
Report").
3. There is seasonality to the water services industry; thus, the results of
operations for the six months ended June 30, 2000 do not necessarily
indicate the results to be expected for the full year. Rainfall and weather
conditions affect utility operations, with most water consumption occurring
during the third quarter of each year when weather tends to be hot and dry.
Drought conditions would have the effect of lowering revenue due to
conservation efforts. The Company's contract operations business can also
be seasonal in nature. Heavy rainfall hampers the Company's ability to
perform billable work such as pipeline maintenance, manhole rehabilitation
and other outdoor services. Moderate rainfall may create additional
opportunities for billable work outside the scope of existing contracts.
Drought conditions would not necessarily affect the Company's opportunities
for additional billable work.
4. The Company records earnings per share ("EPS") by computing basic EPS and
diluted EPS in accordance with generally accepted accounting principles.
Basic EPS is used to measure the performance of the Company over the
reporting period by dividing net income available to common stockholders by
the weighted average number of common shares outstanding during the period.
Diluted EPS is used to measure the performance of the Company over the
reporting period after giving effect to all dilutive potential common
shares that would have been outstanding if the dilutive common shares had
been issued. Stock options give rise to dilutive common shares.
5. As discussed in the Company's Form 10-Q Report for the period ended March
31, 2000 ("the March Report"), in April 2000, the Company purchased 80
percent of the outstanding shares of Master Tek, a nationwide provider of
utility submetering, billing and collection services, for a purchase price
of $4,000,000. The purchase price consisted of a $2,000,000 cash payment
upon closing and a ten-year, $2,000,000 promissory note. The purchase
agreement provides that the Company has the right to acquire the remaining
20 percent ownership for a price based on a formula related to the
financial performance of Master Tek over the next ten years. In addition,
the Company entered into an employment agreement, a consulting agreement
and a non-
4
compete agreement with the owner of the remaining 20 percent of Master Tek
as is customary in transactions of this type. Submetering involves the
installation of electronic equipment in apartments, condominiums, mobile
home parks and other multi-family dwellings to allow the allocation of
water, gas and electricity usage for each individual residential unit.
Master Tek serves more than 200,000 dwelling units in 29 states and, in
1999, generated revenues of more than $5,000,000.
6. As discussed in the 1999 Annual Report, Suburban purchased the City of West
Covina's ("West Covina") water distribution system and facilities. On
February 25, 2000, Suburban assumed ownership and operation of the water
system. The transaction added approximately 7,000 connections to Suburban's
customer base, an increase of approximately 11 percent. The purchase of the
West Covina system was funded in part by the reinvestment of approximately
$3,900,000 of proceeds from the sale of surplus land, as described fully in
the Company's 1999 Annual Report. The remaining funds for the purchase were
obtained from line of credit borrowing.
7. As discussed in the 1999 Annual Report, the Company owns a 49 percent
interest in Windermere, a small, regulated water utility located near
Austin, Texas. The Company has an agreement with the majority shareholder
under which the majority shareholder may purchase the Company's interest in
Windermere for an agreed-upon price. The agreement, as amended, extends to
August 18, 2000 the majority shareholder's right to exercise this purchase
option. The Company is currently holding discussions with the majority
shareholder of Windermere to purchase the majority shareholder's interest
in Windermere along with two other utilities, also located near Austin,
Texas. The Company anticipates that negotiations will be completed in 2000.
8. The Company has two reportable segments as defined under the requirements
of SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." There was no change in the basis of segmentation or in the
basis of measurement of segment profit or loss from the information
reported in the 1999 Annual Report. The following table sets forth required
disclosure about the Company's reportable segments as required by SFAS No.
131.
Total Total
Non- Segment Consolidated
Regulated Regulated Information Other Information
--------------------------------------------------------------------
(in thousands)
Six Months Ended June 30, 2000
- ------------------------------
Revenues from external customers $ 27,501 $ 19,675 $ 47,176 $ 0 $ 47,146
Segment operating profit 1,346 5,635 6,981 (2,081) 4,900
As of June 30, 2000
- -------------------
Segment assets 25,435 131,048 156,483 9,569 166,052
Six Months Ended June 30, 1999
- ------------------------------
Revenues from external customers $ 18,831 $ 17,272 $ 36,103 $ 0 $ 36,103
Segment operating profit 501 5,168 5,669 (1,919) 3,750
As of June 30, 1999
- -------------------
Segment assets 10,013 118,516 128,529 4,323 132,852
5
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
Liquidity and capital resources of the Company are influenced primarily by
construction expenditures at Suburban and NMUI for the addition, replacement and
renovation of water utility facilities. The Company's capital resources may also
be influenced by investments in new business opportunities.
At June 30, 2000, the Company had cash and cash-equivalent balances totaling
$954,000 and three separate unsecured lines of credit from three commercial
banks, with total line of credit capacity of $20,000,000. All of the lines
expire in 2001 and the Company expects to renew expiring lines of credit in the
normal course of business. At June 30, 2000, outstanding borrowing was
$16,524,000, and the unused borrowing capacity was $3,476,000. In the first six
months of 2000, the Company's outstanding line of credit borrowing increased
$9,931,000 primarily due to additional cash requirements for acquisitions and
for additional working capital to fund construction projects. Under two of the
line of credit agreements, interest is charged at each bank's prime rate less
one-quarter percent. The Company may also borrow at an interest rate that is
lower than this rate; however, the amount borrowed must remain outstanding for a
fixed period of time. Interest charged under the third line of credit is lower
than the bank's prime rate and contains no restrictions as to minimum borrowing
or borrowing for a fixed period of time. Two of the line of credit agreements
require a $6,000 annual fee, and the remaining line of credit agreement requires
no annual fee. One of the line of credit agreements requires a commitment fee of
one-quarter of one percent of the unused line, calculated quarterly. Each of the
line of credit agreements, as amended, contains certain financial restrictions.
As of June 30, 2000, the Company was in compliance with all applicable financial
covenants of the line of credit agreements.
In July 2000, two of the banks increased their lines of credit by $3,000,000,
respectively, increasing the total line of credit capacity to $26,000,000. The
terms and conditions of the increased lines of credit did not change due to the
additional borrowing capacity.
In addition to its lines of credit, the Company has existing borrowing capacity
under its First Mortgage Bond Indentures. Under these indentures, the Company
has remaining borrowing capacity of approximately $48,851,000. However, the
amount of additional borrowing available to the Company under its current lines
of credit is limited by financial covenants that restricted additional borrowing
at June 30, 2000 to the unused credit line amount.
During the first six months of 2000, the Company's additions to property, plant
and equipment were $12,999,000, representing an increase of $7,019,000 from
1999. Developers made contributions in aid of construction ("CIAC"), and
advances totaling $2,052,000, of which $944,000 was received in cash and
$1,108,000 was received as non-cash contributions of property. Company-financed
capital additions were $10,947,000, funded primarily by borrowing on the lines
of credit, cash flow from operations, and the reinvestment of proceeds from the
sale of surplus land as discussed in Note 6 to the condensed consolidated
financial statements. The current year increase was due primarily to the
purchase of West Covina's water distribution system and facilities for
$9,356,000. For the remainder of 2000, the Company estimates that its capital
additions will be approximately $5,000,000, and that cash flow from operations
and CIAC will fund these additions. Line of credit borrowing is also available
to meet construction requirements if needed.
The Company anticipates that its available line of credit borrowing capacity and
the cash flow generated from operations will be sufficient to fund its
activities during the next 12 months, including certain new business
investments. If additional cash were needed, the Company would consider
alternative sources, including long-term financing. The amount and timing of any
future long-term financing would depend on various factors, including the
timeliness and adequacy of rate increases, the availability of capital, and the
Company's ability to meet interest and fixed charge coverage requirements.
Regulatory approval is required for any long-term financing by Suburban or NMUI.
If the Company could not renew its existing lines of credit or was unable to
obtain additional long-term financing, capital spending or acquisitions would be
reduced or delayed until new financing arrangements were secured. Such financing
arrangements could include seeking equity financing through a private placement
or a public offering. Similarly, if the Company needed additional cash to fund
an acquisition, financing arrangements could include long-term borrowing or
equity financing.
6
Regulatory Affairs:
Regulation
ECO has two distinct types of contractual relationships: time and material
contracts primarily with municipal utility districts ("MUDs"), and fixed fee
operations and maintenance contracts ("O&Ms"). A MUD is a utility district
created under the rules of the Texas Natural Resource Conservation Commission in
order to provide water, wastewater and drainage services to areas where existing
municipal services are not available. O&M contracts are agreements with cities
and private entities that provide for a specified level of services such as
facility operation and maintenance, meter reading and billing, or management of
the entire water or wastewater system. ECO also performs additional construction
and project work for its MUD and O&M clients. ECO's pricing is not subject to
regulation by any governmental authority. Most contracts with MUDs are short-
term contracts and do not generally include inflation adjustments. Changes in
prices are negotiated on a contract-by-contract basis. ECO's O&M contracts are
generally longer-term water and wastewater service contracts, primarily with
cities, and typically include inflation adjustments. Master Tek's rates are not
currently regulated by any governmental authority.
The California Public Utilities Commission ("CPUC") and the New Mexico Public
Regulation Commission ("NMPRC") regulate the rates and operations of Suburban
and NMUI, respectively. The rates allowed are intended to provide the utilities
an opportunity to recover costs and earn a reasonable return on common equity.
Although neither utility is currently seeking any rate increase, future
construction expenditures and increased operating expenses may require periodic
requests for rate increases. As discussed in the 1999 Annual Report, the CPUC
has directed Suburban to file a general rate application by July 1, 2001.
Regulatory Developments
The Company closely monitors legislative, CPUC and NMPRC developments. The
various water industry associations in which the Company actively participates
also monitor these developments. The Company does not know the future possible
legislative, CPUC or NMPRC changes that will be enacted or the terms of such
changes if enacted. Therefore, management cannot predict the impact, if any, of
future legislative changes, CPUC or NMPRC developments or changes to the
Company's financial position or results of operations.
Environmental Affairs:
As a contract operator, ECO does not own any of the water sources, water
production facilities, or water distribution systems that it operates for its
clients, nor does ECO own any of the wastewater collection systems or wastewater
treatment facilities that it operates for its clients. Although not the owner,
ECO is responsible for operating these water and wastewater facilities in
compliance with all federal, state and local health standards and regulations.
Suburban and NMUI operations fall under the regulatory jurisdiction of the CPUC
and the NMPRC, respectively. The responsibilities of both regulatory agencies
are to ensure an adequate supply of affordable, healthful, potable water to
residents of their respective states. The Company's operations are also subject
to water and wastewater pollution prevention standards and water and wastewater
quality regulations of the Environmental Protection Agency ("EPA") and various
state regulatory agencies. Both the EPA and state regulatory agencies require
periodic testing and sampling of water. Costs associated with the testing of the
Company's water supplies have increased and are expected to increase further as
the regulatory agencies adopt additional monitoring requirements. The Company
believes that future incremental costs of complying with governmental
regulations, including capital expenditures, will be recoverable through
increased rates and contract operations revenues. However, there is no assurance
that recovery of such costs will be allowed. To date, the Company has not
experienced any material adverse effects upon its operations resulting from
compliance with government regulations.
7
As discussed in the Company's 1999 Annual Report, the Company has been named in
several lawsuits alleging water contamination in the Main San Gabriel Basin in
Southern California (the "Main Basin"). In September 1999, the California 2/nd/
District Court of Appeal ordered that the lawsuits be dismissed as to the
Company and other water purveyors. The California Supreme Court has agreed to
review this decision. The Company anticipates that the Supreme Court will hear
the case during 2000.
As discussed in the Company's 1999 Annual Report, in March 1998, the CPUC issued
an order instituting investigation ("OII") directed to all Class A and B water
utilities in California, including Suburban. The purpose of the OII is to
address a series of questions dealing with the safety of current drinking water
standards and compliance with those standards. In February 2000, the CPUC issued
a draft opinion finding that the California Department of Health Services
("DOHS") requirements governing drinking water quality adequately protect the
public health and safety, and that the regulated water utilities have complied
with past and present drinking water quality requirements. While the CPUC
continues to investigate the issues concerned with water quality, the Company
and Suburban are unable to predict what final actions, if any, will be taken by
the CPUC and/or the DOHS as the result of this investigation, or their impact on
the operations or financial position of the Company and Suburban.
On June 21, 2000, Suburban entered into a "Tolling and Standstill Agreement"
with Aerojet whereby Aerojet agreed to toll the running of any statute of
limitations with respect to any rights, claims or causes of action Suburban may
have or wish to assert against Aerojet as a result of Aerojet's release of
contaminants into the Main Basin. This agreement preserves Suburban's and the
Company's rights beyond the normal statute of limitations period.
Risk Factors:
Certain statements contained in this Report on Form 10-Q for the quarter ended
June 30, 2000 ("the June Report") that are not based on historical fact are
"forward-looking" statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements are only projections. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause actual results, performance or achievements of the
Company to be materially different from any performance or achievements planned,
expressed or implied by such forward-looking statements. Although the Company
believes that its expectations are based on reasonable assumptions within the
bounds of its knowledge of its business and operations, there can be no
assurance that actual results will not differ materially from its expectations.
The June Report should be read in conjunction with the Company's 1999 Annual
Report for a more detailed description of the risk factors affecting the Company
which include, but are not limited to, expectations regarding new contracts and
potential acquisitions, weather conditions, water quality issues, regulatory
changes, legal and other contingencies.
Results of Operations:
Three Months Ended June 30, 2000 Compared To Three Months Ended June 30, 1999
Diluted earnings per common share were $.22 in 2000, an increase of 22%,
compared to $.18 during the same period in 1999.
Operating income
Operating income increased $955,000 or 37%, and, as a percentage of operating
revenues, was 13% in both 2000 and 1999. ECO's operating income increased
$463,000, due to the addition of new contracts and an increase in the amount of
project work performed outside the scope of existing contracts, primarily in the
central Texas region. The acquisition of Master Tek increased operating income
by $291,000. Operating income at the utilities increased $338,000, due primarily
to an increase in water consumption by Suburban's customers, which contributed
to a 10% increase in utility operating income. Suburban's increase in operating
income also reflects the addition of West Covina customers following the
acquisition in February 2000. NMUI experienced a 14% increase in water
consumption by its customers and also increased the number of customers it
serves, resulting in a 12% increase in operating income. Parent
8
company expenses increased $140,000, due primarily to increases in benefit-
related costs, including health insurance.
Operating revenues
Operating revenues increased $7,165,000 in the second quarter of 2000 compared
with the same period in 1999. ECO's revenues increased $3,692,000 or 37%, due
primarily to new contracts and to an increase in the amount of project work
performed outside the scope of existing contracts, primarily in the central
Texas region. The acquisition of Master Tek increased operating revenues by
$1,483,000. Utility revenues increased $1,990,000. Suburban's revenues increased
24% due primarily to increased customer water consumption and the addition of
West Covina customers following the acquisition in February 2000. West Covina
contributed $352,000 to operating revenue. NMUI increased its number of
customers by 275 for a total of 8,000 customers, contributing to a 5% increase
in water revenue.
Direct operating expenses
Direct operating expenses increased $5,583,000 or 40%. As a percentage of
operating revenues, these expenses were 74% in 2000 and 72% in 1999. ECO's
direct operating expenses increased $3,109,000, primarily as a result of new
contracts and the increase in the amount of project work performed outside the
scope of existing contracts. Master Tek added $885,000 of direct operating
expenses in connection with Master Tek's second quarter revenue contribution.
The utilities' direct operating expenses increased $1,589,000, increasing 2% as
a percent of operating revenue. The increase was primarily due to Suburban's
increased purchases of more expensive water resulting from higher customer
demand and water consumption, and the addition of West Covina customers
following the acquisition in February 2000.
Selling, general and administrative
Selling, general and administrative expenses for the second quarter of 2000
increased $627,000 as compared with the same period in 1999. As a percentage of
operating revenues, these expenses were 13% in 2000 and 15% in 1999. General and
administrative expenses at ECO increased $117,000 due to increased marketing
costs associated with new contracts. The acquisition of Master Tek added
$307,000 of general and administrative expenses to the second quarter. General
and administrative expenses at the utilities increased $63,000 due to increased
depreciation expense. As discussed above, general and administrative expenses of
the parent company increased $140,000.
Other
Total interest and other expenses increased by $393,000. This was primarily due
to the increase in interest expense associated with increases in line of credit
borrowing to finance the West Covina acquisition in February and the April
Master Tek acquisition, as well as other capital spending. In addition, Master
Tek recorded $107,000 of acquisition goodwill amortization.
Six Months Ended June 30, 2000 Compared To Six Months Ended June 30, 1999
Diluted earnings per common share were $.28 in 2000, an increase of 22%,
compared to $.23 during the same period in 1999.
Operating income
Operating income increased $1,150,000 or 31%, and, as a percentage of operating
revenues, was 10% in both 2000 and 1999. ECO's operating income increased
$554,000, due to the addition of new contracts and an increase in the amount of
project work performed outside the scope of existing contracts, primarily in the
central Texas region. The acquisition of Master Tek contributed $291,000 to
operating income in the second quarter. Operating income at the utilities
increased $467,000, due primarily to a 16% increase in water consumption by
Suburban's customers, which contributed to an 11% increase in utility operating
income. Suburban's increase in operating income also reflects the addition of
9
West Covina customers following the acquisition in February 2000. Parent company
expenses increased $162,000, due primarily to increases in benefit-related
costs, including health insurance.
Operating revenues
Operating revenues increased $11,073,000, or 31% in the first six months of 2000
compared with the same period in 1999. ECO's revenues increased $7,187,000 or
38%, due primarily to new contracts and to an increase in the amount of project
work performed outside the scope of existing contracts, primarily in the central
Texas region. The acquisition of Master Tek increased operating revenue by
$1,483,000. Utility revenues increased $2,403,000. Suburban's revenues increased
16% due primarily to increased customer water consumption and the addition of
West Covina customers, following the acquisition in February 2000, which
contributed $1,689,000 to operating revenues. NMUI increased its number of
customers to 8,000, contributing to a 4% increase in water revenue.
Direct operating expenses
Direct operating expenses increased $9,120,000 or 34%. As a percentage of
operating revenues, these expenses were 76% in 2000 and 74% in 1999. ECO's
direct operating expenses increased $6,517,000, primarily as a result of new
contracts and the increase in the amount of project work performed outside the
scope of existing contracts, primarily in the central Texas region. The
acquisition of Master Tek added $885,000 to direct operating expenses in
connection with Master Tek's second quarter revenue contribution. The utilities'
direct operating expenses increased $1,718,000, and increased 2% as a percentage
of operating revenue. The increase was primarily due to Suburban's increased
purchases of more expensive water resulting from higher customer water demand
and consumption, and the addition of West Covina customers, following the
acquisition in February 2000.
Selling, general and administrative
Selling, general and administrative expenses for the first six months of 2000
increased $803,000 as compared with the same period in 1999. As a percentage of
operating revenues, these expenses were 14% in 2000 and 16% in 1999. General and
administrative expenses at ECO increased $116,000 due to increased marketing
costs associated with new contracts. The acquisition of Master Tek added
$307,000 of general and administrative expenses to the second quarter. General
and administrative expenses at the utilities increased $218,000 because of a
decrease in the amount of capitalized administrative overhead at both Suburban
and NMUI. As discussed above, general and administrative expenses of the parent
company increased $162,000.
Other
Total interest and other expenses increased $460,000. This is primarily due to
the increase in interest expense associated with increases in line of credit
borrowing to finance the West Covina and Master Tek acquisitions, as well as
other capital spending. The increase also reflects higher interest rates in 2000
compared to 1999. In addition, Master Tek recorded $107,000 of acquisition
goodwill amortization.
PART II - OTHER INFORMATION
Item 1: Legal Proceedings
As discussed in the Company's 1999 Annual Report, ECO was named as a defendant
in four lawsuits alleging injury and damages as the result of a sewage spill,
which occurred at an Austin, Texas sewage pumping station. The case is presently
in the discovery stage. No oral depositions have been taken and there have been
no court hearings. The Company and ECO intend to vigorously defend against these
claims and have requested defense and indemnification by their insurance
carrier. At this time, the Company does not believe this matter will have a
material adverse effect on the Company's financial position or results of
operations.
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As discussed in the Company's 1999 Annual Report, the Company has been named in
several lawsuits alleging water contamination in the Main Basin. In September
1999, the California 2/nd/ District Court of Appeal ordered that the lawsuits be
dismissed. The California Supreme Court has agreed to review this decision. The
Company anticipates that the California Supreme Court will hear oral argument
during 2000. The Company and Suburban have requested defense and indemnification
from their liability insurance carriers for these lawsuits. Several of the
liability insurance carriers are currently contributing to the costs of defense
of the lawsuits. Two additional lawsuits similar to those described in this
paragraph were filed in April 2000 by approximately 240 plaintiffs against
Suburban, the Company, and other water producers in the Main Basin and a number
of alleged industrial polluters. One of the actions has been served. The
remaining action has not yet been served on the Company or Suburban. The Company
expects to defend the new actions on the same basis as the earlier actions.
Based upon information available at this time, management does not expect that
these actions will have a material adverse effect on the Company's financial
position or results of operations.
As discussed in the Company's 1999 Annual Report, in October 1998 the Company
and ECO were sued in an action in Texas arising out of a fatal auto accident.
The Company believes that its maximum exposure in this action is limited to the
self-insured retention under its umbrella liability policy. Based on the
information available at this time, management does not expect that this action
will have a material adverse effect on the Company's financial position or
results of operations.
As discussed in the 1999 Annual Report, the City of Albuquerque ("Albuquerque")
initiated an action in eminent domain to acquire the operations of NMUI. The
Company believes that the fair market value of NMUI is substantially in excess
of the amount offered in Albuquerque's complaint. Under New Mexico state law,
there are procedures that would allow Albuquerque to take possession prior to a
resolution of the fair market value issue; however, the Company believes that it
has adequate defenses should Albuquerque choose to pursue these procedures.
There is no assurance that a settlement of the legal action or any other
resolution will be reached quickly.
The Company and its subsidiaries are the subjects of certain litigation arising
from the ordinary course of operations. The Company believes the ultimate
resolution of such matters will not materially affect its consolidated financial
position, results of operations or cash flow.
Item 4: Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders held on May 23, 2000, Monroe Harris,
Donovan D. Huennekens, and Richard G. Newman, members of the Board of Directors
were reelected by the following votes:
Mr. Harris; votes for - 5,162,167; and votes abstaining - 374,036.
Mr. Huennekens; votes for - 5,169,853; and votes abstaining - 366,350.
Mr. Newman; votes for - 5,197,744; and votes abstaining - 338,459.
The selection of KPMG LLP as the Company's independent auditors was ratified by
the following vote: votes for - 3,485,230; votes against - 10,332; and votes
abstaining - 41,984.
The Second Amended and Restated Stock Option Plan was approved by the following
vote: votes for - 3;064,521 votes against - 794,457; and votes abstaining -
221,971.
The Amended and Restated Stock Option Plan for Non-Employee Directors was
approved by the following vote: votes for - 3,459,244 votes against - 380,244;
and votes abstaining - 241,481.
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Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits furnished pursuant to Item 601 of Regulation S-K:
10.7 Tolling Agreement between Suburban Water Systems and Aerojet dated
June 20, 2000, filed herewith.
10.11A First Amendment to Credit Agreement dated June 30, 2000 between
Registrant and Bank of America, filed herewith.
10.13C Third Amendment to the Amended and Restated Credit Agreement
dated July 19, 2000 between Registrant and Mellon Bank, filed
herewith.
27 Financial Data Schedule.
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
SOUTHWEST WATER COMPANY
-----------------------
(Registrant)
Dated: August 14, 2000 /s/ PETER J. MOERBEEK
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Peter J. Moerbeek
Chief Financial Officer
Dated: August 14, 2000 /s/THOMAS C. TEKULVE
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Thomas C. Tekulve
Chief Accounting Officer
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